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New 15% stamp duty on UK property over £2 million bought through a company

Wednesday, 21 March 2012

A loophole which allows wealthy people to buy a property in the UK through a foreign company and thus avoid paying stamp duty has been effectively closed today (Wednesday March 21) by the government.

In his Budget Chancellor of the Exchequer George Osborne announced that stamp duty of 15% will be payable on properties over £2 million bought through a company.

He also announced that the government plans to consult on introducing a ‘large annual charge’ on £2 million properties which have already bought through companies.

Osborne said capital gains tax will also apply on residential properties through overseas companies, to ensure wealthy non UK residents have to comply with the changes.

The Government has also issued legislation to close a loophole which allowed people to avoid stamp duty through sub sales relief by putting their home in a trust.

‘Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament,’ said Osborne.

‘I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned,’ he added.

Currently Stamp Duty kicks in at £125,000 and is charged at 1%, rising to 5% on properties worth over £1 million. A new 7% rate has also been announced today for properties over £2 million.

Now there is the 15% charge aimed at wealthy overseas owners and ultra wealthy British people who have exploited a loophole by buying properties through an offshore company.

But professionals in the industry do not think the move will put off wealthy overseas buyers who are currently taking luxury property in central London to new price highs.

But it will mean they have to pay tax. ‘Whilst we’ll need to look at the detail of the anti avoidance provisions, our initial thoughts are that this marks the end of the use of corporate vehicles to avoid stamp duty. Irrespective of consultation on a large annual charge, that looks and feels like a mansion tax aimed at overseas owners, albeit by another name, a 15% stamp duty charge for such transactions is probably a sufficient deterrent,’ said a spokesman for Savills.

The big question is whether there will be an opportunity for those who have used this route be given to undo it without being hit by the proposed CGT charge. ‘We’ll also need to look at whether transfer from corporate to personal ownership triggers a stamp duty charge at 7%. There is clearly a risk that this is seen as retrospective in nature and overtly aggressive. That could impact on London’s attractiveness to overseas buyers. However, much depends on the detail,’ the spokesman added.

But James Wyatt of Surrey based Barton Wyatt agents who have seen 35% of their properties sold to overseas buyers since the start of 2012, does not think the move will put them off. He pointed out that they want the very best and are prepared to pay for it.

‘Foreigners pay an average of £8 million for a house and have taken advantage of the loophole using an offshore company in the past however at this price point, I doubt the revised 7% stamp duty applicable on standard purchase vehicles moving forward would put off a serious buyer,’ he said.

‘The problem we face in the Home Counties is not the closure of the stamp duty loophole but a dwindling stock of new properties of a high enough calibre which will inevitably lead to price rises,’ he added.

Nicholas Leeming, business development director at Zoopla, reckons that it might be difficult to sort out. Policing the clampdown will be difficult and there are no guarantees that some transactions won’t slip through the net. There is no doubting the government’s intention, but it remains to be seen if this will be an effective measure,’ he said.

But David Kilshaw, tax partner at KPMG thinks it will hit the high end London property market as well as costing wealthy investors more.

‘Most overseas nationals bought their UK property via a company not to save the relatively modest stamp duty but to avoid inheritance tax. Whereas stamp duty would be £1 million on a £20 million home, that paled into insignificance when compared to the 40% inheritance charge which would be £8 million on death,’ he said.

‘Now a company is not as attractive, the stamp charge rises three fold to over £3 million and there will also be an annual levy of up to £140,000. This changes the dynamics. Overseas nationals may now decide to buy elsewhere where they are not exposed to death duties,’ he explained.

‘Inheritance tax will now stalk the streets of Chelsea. This could change the whole dynamics of the London property scene. Overseas investors may now think twice before they buy in London. For overseas nationals, this is a mansion tax with a capital M,’ he added.

Bart Peerless, head of the Private Wealth Sector at Law Firm Charles Russell also thinks it will hit the London property market. ‘The devil will clearly be in the detail of the tax changes affecting property, but the implication seems to be that to avoid these new penal rates of tax and the new capital gains tax charge international purchasers should own properties personally and not through other entities such as offshore companies,’ he said.

‘For such individuals the main reason for holding through a non-UK company was usually Inheritance Tax mitigation. If that risk now has to be managed in other, more costly, ways it may well affect sentiment towards the London property market,’ he added.

Paul Emery, PwC tax director, said that the consultation on an annual property tax for high value residential held by companies and a capital gains tax on off shore companies may cause owners to think twice about their current ownership structure.

‘The announcement that the new General Anti-Avoidance Rule (GAAR) is to include stamp duty land tax is a surprise but perhaps explains why, over five years after a stamp duty specific GAAR was introduced, we have yet to see HMRC argue a case in court,’ he added.

‘Investors in UK commercial real estate will breathe a huge sigh of relief that the tax is restricted to residential property otherwise this could have had a significant impact on liquidity in the commercial real estate sector,’ he said.

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